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Credit crunch expanding for Chinese property developers as Kaisa's trading is halted

Evergrande's liquidity problems and the pressure on rivals Kaisa Group and Fantasia to make debt repayments point to how refinancing in the property development sector will only become more difficult.
Credit crunch expanding for Chinese property developers as Kaisa's trading is halted

Hong Kong-listed Chinese real estate developer Kaisa Group (Kaisa) and three of its subsidiaries each suspended trading in their shares last Friday (November 5), adding to worries that Evergrande is not the only heavily indebted property developer on the mainland.

Kaisa announced the night before it halted trading that its finance unit had missed a payment on a wealth management product. Among Chinese developers, the group ranks second only to Evergrande for issuance of US dollar-denominated offshore high-yield bonds, according to a Natixis’ report.

Sean Chang, Ping An

But investors knew some of this story already. In 2015, Kaisa was the first Chinese developer to default on its dollar bonds which were subsequently restructured.

ALSO READ: What next as Evergrande misses second coupon payment

“These kinds of events and market volatilities could happen in any markets. There would be a transition process to fill in any loopholes which develop throughout different market cycles, but finally to make the system and policy more effective and strengthened,” Sean Chang, head of fixed income, Ping An of China Asset Management (Hong Kong), told AsianInvestor.

Kaisa's shares fell by as much as 13% last week before the trading suspension, and has fallen nearly 70% this year. Reuters reported last week that the group is selling its property management unit to raise capital to cover some of its liabilities. The report also noted that Kaisa management revealed during a meeting that the company owes its creditors a total of Rmb12.79 billion ($2 billion) in principal and interest.

Although this amount is small compared to Evergrande's $300 billion debt, the situation highlights the growing credit pressure in the sector.

Fantasia, another Shenzhen-based developer, is also in trouble. It did not repay a $205.7 million bond that was due on October 4 and local media outlet Cailianshe is reporting that Shenzhen regulators met last Friday to discuss Fantasia and Kaisa's liquidity issues.

RATINGS DOWN

In late October, Fitch Ratings downgraded Kaisa's long-term foreign-currency issuer default rating to 'CCC+', from 'B'. The ratings firm also downgraded the senior unsecured rating and the rating on Kaisa's outstanding US-dollar senior notes' to 'CCC+' from 'B'. 

The downgrade reflects Kaisa's limited access to funding and uncertainties over the refinancing of a significant amount of US-dollar bond maturities and coupon payments between now and the end of 2022, including $400 million due in December, and around $3 billion due next year. Coupons on the company's US dollar bonds are also substantial at around $1 billion per year. 

Adrian Cheng,
Fitch Ratings

“Contagion has surfaced across parts of China’s homebuilding sector, triggered by the distress of Evergrande and aggravated by subsequent credit events involving other developers," Adrian Cheng, senior director for Asia Pacific corporates at Fitch Ratings, told AsianInvestor

"We expect capital markets to be shut for most Chinese developers, so refinancing risks are going to persist for a while and will impact those with imminent and sizeable maturities during 2022. We have to assume that issuers will need to repay capital market debt with cash on hand and liquidity generation," Cheng added.
 
He noted the other factors driving recent events, "such as over-extension by some developers, reaction to a recent tightening in macro-prudential regulations over mortgage and property lending and the significant slowdown in credit growth this year," he said. 
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